Question Tag: Depreciation

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PSAF – Nov 2024 – L2 – Q2a – Valuation of Legacy Fixed Assets

Valuation and accounting treatment of legacy fixed assets in compliance with IPSAS.

Question

The Ministry of Indigenous Enterprises has been charged to collect legacy fixed assets data and value them in accordance with International Public Sector Accounting Standards (IPSAS). The Fixed Assets Coordinating Unit (FACU) of the Ministry has collected for valuation the following data for your action:

The Ministry owns a four (4) storey Office Administration block. The average cost per floor is GH¢4,741,256.25. The building was constructed on a land size of 20 plots of land owned by the Ministry. Currently, a plot of land in that area costs GH¢2,500,000. The FACU has measured the sizes of the building as follows:

Length: 87.5 meters
Width: 42.65 meters
Reference Price per Square Meter: GH¢4,432

However, a professional body, the Institute of Architects and Engineers, has given the reference price for the cost of such an office building at an estimated price of GH¢87,965,025. The building has not seen any further facelift ever since. However, a fence wall with a gate to enforce security and secure the land has just been completed in the current year at a cost of GH¢8,970,000 with a lifespan of 50 years.

The year of construction of the office building could not be determined, yet an old watchman who had been there for ages remembers that the building was constructed some 42 years ago, a time when his seventh child was born. It is the decision of the Government of Ghana on the adoption of IPSAS not to take advantage of the three-year exemption period but to account for legacy fixed assets by taking 60% of the reference cost of the legacy assets as the deemed cost, with a reduced lifespan of 30 years.

Required:

i) Calculate the cost of the land and buildings with structures to be brought into the books on the adoption of IPSAS and determine the depreciation chargeable in the first year in respect of these assets. ii) Show the extract of Statement of Financial Position of the Ministry of Indigenous
Enterprises as at that date

Answer

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Tags: Depreciation, Financial Statements, Fixed Assets, IPSAS, Public Sector, Valuation
Level: Level 2

PT – Nov 2024 – L2 – Q4c – Tax Treatment of Repairs and Renovations

Explains the tax treatment of repairs and renovations for businesses.

Question

Question:
Repairs are essential for maintaining the safety of a property, and renovation improves the overall functionality of a property.

Required:
What is the tax treatment of repairs and renovations?

Answer

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Tags: Capital allowances, Depreciation, Renovations, Repairs, Tax Deductibility, Tax Treatment
Level: Level 2

Topic: Corporate Tax Liabilities
Series: Nov 2024

FR – Nov 2024 – L2 – Q3 – Financial Statements Preparation

Preparation of Fahnbulleh LTD’s Statement of Comprehensive Income and Statement of Financial Position using IFRS.

Question

Fahnbulleh LTD (Fahnbulleh) is a well-known company manufacturing thrill rides. During the current economic climate, Fahnbulleh has experienced some difficulties and has had to close down its Merry Go Round division.

The company’s trial balance as at 31 October 2023 is as follows:

Account Description	Dr (GH¢’000)	Cr (GH¢’000)
Revenue		1,296,000
Cost of Sales	546,480
Distribution Costs	127,080
Administrative Expenses	142,560
Investment Income		28,080
Investment Property	270,000
Interest Paid	17,280
Income Tax	10,800
Property, Plant & Equipment (PPE) – Carrying Value at 1 Nov 2022	1,620,000
Inventories (31 October 2023)	108,000
Trade Receivables	135,000
Bank	64,800
Payables		43,200
Deferred Tax (1 Nov 2022)		75,600
8% Loan Note		432,000
Ordinary Share Capital (GH¢1 per share)		540,000
Retained Earnings (1 Nov 2022)		605,520
Totals	3,031,200	3,031,200

Additional Information:

Revenue Adjustments:
- Revenue includes VAT of GH¢72 million.
Property, Plant & Equipment (PPE):
- A building with a carrying value of GH¢54 million was revalued on 1 November 2022 to GH¢72 million.
- The building had an estimated useful life of 25 years when purchased, and this has not changed after the revaluation.
- All other PPE should be depreciated at 20% per annum (reducing balance method).
- All depreciation should be charged to cost of sales.
Closure of the Merry Go Round Division (Discontinued Operations):
- Closure Date: 1 October 2023
- Division’s Results (1 Nov 2022 – 1 Oct 2023):
Item GH¢’000

Revenue 58,800

Cost of Sales 38,700

Distribution Costs 12,240

Administrative Expenses 11,880
- The division’s net assets were sold at a loss of GH¢19.2 million, recorded in cost of sales.
Investment Property Revaluation (IAS 40):
- Investment property value increased by 5%, which should be incorporated into the financial statements.
Income Tax and Deferred Tax (IAS 12):
- The estimated income tax provision for the year: GH¢140.4 million.
- Deferred tax liability should be adjusted for temporary differences (GH¢129.6 million) at a 25% tax rate.
Damaged Inventory (IAS 2):
- Inventory worth GH¢46 million was damaged.
- It can be reconditioned at a cost of GH¢12 million and sold for GH¢52 million.
- Appropriate adjustments should be made.

Item	GH¢’000
Revenue	58,800
Cost of Sales	38,700
Distribution Costs	12,240
Administrative Expenses	11,880

Required:

Prepare and present the Statement of Comprehensive Income for the year ended 31 October 2023 and the Statement of Financial Position as at 31 October 2023 for Fahnbulleh LTD.

Answer

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Tags: Depreciation, Financial Statements, IFRS, Revaluation, Statement of Comprehensive Income, Statement of Financial Position, Trial Balance
Level: Level 2

Topic: Preparation of Financial Statements
Series: Nov 2024

FA – Nov 2024 – L1 – Q4- Preparation of Financial Statements for a Sole Trader

Prepare the Statement of Profit or Loss and Statement of Financial Position for a sole trader from given financial data and adjustments.

Question

The following list of assets, liabilities, and equity as at 30 June 2023 was extracted from the books of Akuorkor, a sole trader:

Trial Balance as at 30 June 2023

Item	GH¢
Plant and equipment – cost	100,000
Accumulated depreciation – Plant & Equipment	36,000
Office fixtures – cost	25,000
Accumulated depreciation – Office Fixtures	2,500
Inventory	15,250
Trade receivables and prepayments	17,500
Trade payables and accrued expenses	8,800
Bank overdraft	4,425
Loan (10% interest per annum)	47,500
Capital	58,525

Summary of Receipts and Payments for the Year Ended 30 June 2024

Receipts	GH¢
Capital introduced	11,000
Cash from customers	213,750
Total Receipts	224,750

Payments	GH¢
Cash drawings (Note 5)	11,225
Loan repayments (Note 7)	10,000
Payment to suppliers	87,800
Rent	11,000
Wages	45,000
Office expenses	6,250
Total Payments	171,275

Additional Information:

Closing inventory on 30 June 2024 was GH¢13,925.
Depreciation policies:
- Plant & Equipment: 20% per annum reducing balance.
- Office Equipment: 10% per annum on cost.
- Fixtures & Fittings: Straight-line method over 4 years with a full year’s charge in the year of acquisition.
GH¢2,500 worth of fixtures & fittings was introduced into the business.
Prepayments and accrued expenses as at 30 June 2023:
- Rent paid in advance: GH¢1,250
- Accrued wages: GH¢2,150
Cash drawings included:
- Wages: GH¢3,375
- Payments to suppliers: GH¢2,100
- Advertising leaflets: GH¢1,300 (Half not yet distributed).
Bank balance per statement: GH¢53,350 after adjusting for unpresented cheques.
Loan repayments include GH¢4,750 in interest payments.
Assets and liabilities as at 30 June 2024:
- Rent paid in advance: GH¢1,350
- Accrued wages: GH¢2,625
- Amounts due to suppliers: GH¢6,100
- Amounts due from customers: GH¢11,150
Major customer went into liquidation owing GH¢8,000; only 20% recoverable.

Required:

Prepare:
i) Statement of Profit or Loss for Akuorkor for the year ended 30 June 2024.
ii) Statement of Financial Position as at 30 June 2024.

Answer

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Tags: Accruals and Prepayments, Depreciation, Inventory, Loan Interest, Sole Trader, Statement of Financial Position, Statement of Profit or Loss
Level: Level 1

Topic: Preparation of financial statements of a sole trader
Series: Nov 2024

ATAX – May 2016 – L3 – Q5 – Taxation of Companies

Compute the original and revised tax liabilities of Atlas Nigeria Limited, considering tax official adjustments.

Question

Atlas Nigeria Limited is into the sale of Mobile Phones, and the company’s year-end is December 31 of each year. The company’s Annual Tax Returns for the year ended December 31, 2012, were submitted in January 2014. Tax officials found a number of irregularities during a routine examination of the Tax Returns. They discovered that trade payables included N940,000 representing VAT for the two months to December 31, 2012. All sales attract VAT. There was no Input VAT during 2012. Tax officials were, however, of the opinion that the income of the company accrued uniformly throughout the 12 months of the year.

The accounts showed Adjusted Profits of N44,062,500, and Capital Allowances totaled N33,025,000. The tax liability arrived at was N4,406,250. The tax officials were not satisfied with the explanations received in connection with the Withholding Tax on the Director’s fee of N1,562,500, as well as Consultancy fee of N812,500. They also decided to write back 2/3 of the following expenses:

Printing and Stationery N168,750
Donations and Subscription N1,320,620
Losses claimed, amounting to N128,025 was disallowed. Included in the adjusted profit figure is N6,962,500 for Depreciation.

REQUIRED:

i. Show the computations resulting in the Original Tax Liability of N4,406,250 (5 marks)

ii. Compute a revised Tax liability based on the findings of the Tax Officials (10 marks)

Answer

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Tags: Adjusted Profits, Depreciation, Donations, Tax liabilities, Withholding Tax
Level: Level 3

Topic: Taxation of Companies

CR – May 2021 – L3 – Q5b – Provisions, Contingent Liabilities, and Discounted Cash Flows (IAS 37)

Calculate provisions and charges for emission modifications in 2015 and 2016 for Gama Plastic Limited.

Question

Gama Plastic Limited owns a number of plastic recycling plants in various parts of the country which supply most of the raw material used by Gama Plastic Limited for its production of household and corporate plastic products.

On December 1, 2015, the directors of Gama Plastic Limited announced publicly that it intends to voluntarily reduce the level of harmful emissions from its recycling plants through modifications of the plants.

The average useful economic life of these plants as of December 31, 2015, was 15 years. Gama Plastic Limited charges depreciation in relation to the recycling plants to cost of sales on a straight-line basis.

The directors believe that while the modifications will be effective from early 2016 onward, the actual cash costs of the modifications will be as follows:

Date	Amount (N’000)
December 31, 2016	100,000
December 31, 2017	80,000
December 31, 2018	140,000

No contract was signed until 2016, but Gama Plastic Limited prides itself on its excellent public image and has a well-known reputation for meeting both legal and constructive obligations.

The directors of Gama Plastic Limited believe that it is appropriate to use discounted cash flow techniques and that an appropriate rate would be 10%, with the following discount factors:

Year	PV Factor
1	0.909
2	0.826
3	0.751
4	0.683
5	0.620
6	0.564

Required:

Assuming the actual cash cost of the modification is a reliable estimate, calculate the provisions that should be included in the statement of financial position and the charges to the statement of profit or loss of Gama Plastic Limited in respect of the proposal for each of the years 2015 and 2016. (7 Marks)

Answer

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Tags: Depreciation, Discounted Cash Flow, Emission Modifications, IAS 37, Provisions
Level: Level 3

Topic: Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

CR – May 2021 – L3 – Q1c – Property, Plant and Equipment (IAS 16)

Record journal entries for PPE acquisition and related foreign exchange adjustments in the books of Ngono Plc.

Question

c. Ngono Plc. has a financial year end of September 30. The Company buys property, plant and equipment for its office in Nigeria from foreign supplier Omaha Inc. in USA. On June 30, 2020, Ngono Plc. took delivery of PPE from Omaha Inc. with invoice value amounting to $100,000 and is due for settlement in equal instalments on August 30, 2020 and November 30, 2020. Clearing cost and import duty paid on the acquisition of the PPE amounted to N1,250,000. It is the policy of Ngono Plc to depreciate PPE at 20% on cost using the straight –line method. The depreciation is provided in full in the year of acquisition and none in the year of disposal.
Both Ngono Plc. and Omaha Inc. honoured their own part of the agreement in the transaction.
Movement recorded in the exchange rate were as follows:

Required:
Show the journal accounting entries to record the above transaction in the books of Ngono Plc. (10 Marks)

Answer

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Tags: Depreciation, Foreign Exchange, Journal Entries, PPE
Level: Level 3

Topic: Property, Plant, and Equipment (IAS 16)

CR – May 2022 – L3 – Q1 – Leases (IFRS 16)

Adjust lease accounting for right-of-use asset and lease liability in compliance with IFRS 16.

Question

The draft financial statements of Gbola Limited group and its investee companies Tanko Limited and Eze Limited at December 31, 2018 are shown below:

Draft Statements of Profit or Loss for the Year Ended December 31, 2018

Item	Gbola Limited (N’000)	Tanko Limited (N’000)	Eze Limited (N’000)
Revenue	17,070	7,320	2,235
Cost of Sales	(8,640)	(3,210)	(885)
Gross Profit	8,430	4,110	1,350
Other Operating Expenses	(2,070)	(810)	(600)
Profit from Operations	6,360	3,300	750
Interest Expense	(570)	(660)	(210)
Profit Before Tax	5,790	2,640	540
Income Tax Expense	(810)	(360)	(90)
Profit for the Year	4,980	2,280	450

Draft Statements of Financial Position as at December 31, 2018

Additional Information

On January 1, 2014, Gbola Limited acquired 9,000,000 ordinary shares in Tanko Limited for N23,250,000 when the reserves of Tanko Limited were N3,000,000.
A new asset with a fair value of N1,500,000 was acquired during the year under a lease agreement by Gbola Limited. A clause in the lease agreement stipulated that N300,000 payments must be paid on December 31, each year for six years, starting from December 31, 2018. The interest rate implicit in the lease is 5.47%. Gbola Limited treated this as an operating expense; because the only accounting entry that the company believes must be made in relation to this asset is the N300,000 payment it has made.
Gbola Limited had an intangible asset of N750,000 for software in its statement of financial position. The directors of Gbola Limited believed that the software will have no recoverable value at the date of acquisition, and Tanko Limited wrote it off shortly after its acquisition.
At the date of acquisition of Tanko Limited, the carrying amount of its property, plant, and equipment, considered to have a remaining life of 10 years, was N5,625,000 lower than its fair value.
On January 1, 2017, Gbola Limited acquired 2,250,000 ordinary shares in Eze Limited for N6,000,000 when the reserves of Eze Limited were N1,350,000. The carrying amount of assets of Eze Limited was the same as their fair values at that date. Depreciation should be treated as an operating expense.
A component used by both Tanko Limited and Eze Limited is produced by Gbola Limited, and it sells this component at a margin of 25%. Goods worth N780,000 were sold to Tanko Limited during the year. None of these goods had been sold by Tanko Limited at December 31, 2018. Gbola Limited also sold goods worth N1,200,000 to Eze Limited, and Eze Limited sold all of these goods as at December 31, 2018.
N900,000 in respect of amounts owed by Tanko Limited and N525,000 in respect of amounts owed by Eze Limited were included in the receivables of Gbola Limited. The corresponding balances in Tanko Limited and Eze Limited payables were N600,000 and N525,000, respectively. On December 31, 2018, Tanko Limited sent a cheque of N300,000 to Gbola Limited.
There has been no impairment for Eze Limited. However, the impairment test conducted on Tanko Limited’s goodwill showed that goodwill is being impaired by 10% per annum on a straight-line basis.
Gbola Limited’s cash and cash equivalents included a Director’s loan of N1,500,000. The Directors are of the view that the inclusion does not contravene any International Financial Reporting Standard.
The goodwill arising on the acquisition of Tanko Limited is being amortized over a 10-year period, though this practice contravenes IAS 36, which prohibits goodwill amortization and instead requires annual impairment tests.

a. Prepare the necessary adjustments to account for the lease contract based on additional information provided in (ii) above in accordance with IFRS 16. (5 Marks)
b. Prepare the consolidated statement of profit or loss and other comprehensive income for the group for the year ended December 31, 2018. (8 Marks)
c. Prepare the consolidated statement of financial position of Gbola Limited group as at December 31, 2018. (12 Marks)
d. Discuss the ethical implication of the Director’s action in note (ix) above. (5 Marks)

Answer

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Tags: Depreciation, IFRS 16 Adjustments, Interest expense, Lease Liability, Right-of-Use Asset
Level: Level 3

Topic: Leases (IFRS 16)

CR – Nov 2016 – L3 – Q6 – Events After the Reporting Period (IAS 10)

Discuss IFRS 5 requirements for non-current assets held for sale and evaluate event impacts per IAS 10.

Question

Maranathan Plc acquired a property for N4 million with annual depreciation on a straight-line basis at 7.5%. An impairment loss of N350,000 was recognized as of May 31, 2013, with accumulated depreciation at N1 million. The property was classified as held for sale on October 1, 2013, with fair value less costs to sell of N2.4 million. In December 2013, interim financials reported an improved fair value less costs to sell of N2.52 million. By May 31, 2014, fair value increased to N2.95 million, and the property was eventually sold on June 5, 2014, for N3 million.

Required:

a. Assess these transactions per IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. (5 Marks)
b. Evaluate the impact of events on the property over time and on reported gain per IAS 10 Events After the Reporting Period. (10 Marks)

Answer

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Tags: Depreciation, Disposal Gain, Held for Sale, Impairment Loss, Non-current Assets
Level: Level 3

Topic: Events After the Reporting Period (IAS 10)

FM – Nov 2021 – L3 – Q1 – Strategic Cost Management

Analyze costs and investment requirements for Femi Appliances Ltd's new motor vehicle vacuum cleaner product line.

Question

Femi Appliances Limited (FAL) is a Nigerian-based manufacturer of household appliances with many distribution centers across various locations in Nigeria and along the ECOWAS sub-region. FAL is now considering the development of a new motor vehicle vacuum cleaner – VC4.

The product can be introduced quickly and has an expected life of four years, after which it may be replaced with a more efficient model. Costs associated with the product are estimated as follows:

Direct Costs (per unit):

Labour:
- 3.5 skilled labour hours at ₦500 per hour
- 4 unskilled labour hours at ₦300 per hour
Materials:
- 6 kilos of material Z at ₦146 per kilo
- Three units of component P at ₦480 per unit
- One unit of component Q at ₦640
Other variable costs: ₦210 per unit

Indirect Costs:

Apportionment of management salaries: ₦10,500,000 per year
Tax allowable depreciation of machinery: ₦21,000,000 per year
Selling expenses (excluding salaries): ₦16,600,000 per year
Apportionment of head office costs: ₦5,000,000 per year
Rental of buildings: ₦10,000,000 per year
Annual interest charges: ₦10,400,000
Other annual overheads: ₦7,000,000 (includes building rates ₦2,000,000)

If the new product is introduced, it will be manufactured in an existing factory, having no effect on rates payable. The factory could be rented out for ₦12,000,000 per year to another company if the product is not introduced.

New machinery costing ₦86,000,000 will be required, depreciated on a straight-line basis over four years with a salvage value of ₦2,000,000. The machinery will be financed by a four-year fixed-rate bank loan at 12% interest per year. Additional working capital requirements may be ignored.

The new product will require two additional managers at an annual gross cost of ₦2,500,000 each, while one current manager (₦2,000,000) will be transferred and replaced by a deputy manager at ₦1,700,000 per year. Material Z totaling 70,000 kilos is already in inventory, valued at ₦9,900,000.

FAL will utilize the existing advertising campaigns for distribution centers to also market the new product, saving approximately ₦5,000,000 per year in advertising expenses.

The unit price of the product in the first year will be ₦11,000, with projected demand as follows:

Year 1: 12,000 units
Year 2: 17,500 units
Year 3: 18,000 units
Year 4: 18,500 units

An inflation rate of 5% per year is anticipated, with prices rising accordingly. Wage costs are expected to increase by 7% per year, and other costs (including rent) by 5% annually. No price or cost increases are expected in the first year of production.

Income tax is set at 35%, payable in the year the profit occurs. Assume all sales and costs are on a cash basis and occur at the end of the year, except for the initial purchase of machinery, which would take place immediately. No inventory will be held at the end of any year.

Required:

a. Calculate the expected internal rate of return (IRR) associated with the manufacture of VC4. Show all workings to the nearest ₦million. (19 Marks)

b. i. Explain what is meant by an asset beta and how it differs from an equity beta. (2 Marks)
ii. Given the company’s equity beta is 1.2, the market return is 15%, and the risk-free rate is 8%, discuss whether introducing the product is advisable. (4 Marks)

c. The company is concerned about a potential increase in corporate tax rates. Advise the directors by how much that the tax rate would have to change before the project is not financially viable. A discount rate of 17% per year may be assumed for part (c). (5 Marks)

Answer

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Tags: Cost Analysis, Depreciation, Financial strategy, Investment Appraisal, Labour Costs, Material Costs, Overhead Allocation, Product Development, Profitability analysis, Strategic Decision-Making
Level: Level 3

Topic: Strategic Cost Management

CR – Nov 2017 – L3 – Q2a – IAS 20

Explain the financial reporting treatment for a grant awarded for equipment purchase and subsequent repayment under IAS 20.

Question

Dodowa Ltd is a large textile manufacturing company. Wherever possible, it structures its operations to take advantage of any financial assistance available from national and regional authorities.

During the year, a heavy-duty equipment was purchased for Dodowa Ltd’s main manufacturing operation for GH¢12 million on 1 April 2015. The equipment was expected to be used for 10 years, with a zero residual value. Dodowa Ltd pre-applied for a government grant on 1 January 2015, meeting all necessary criteria for awarding the grant. On 1 February 2015, the grant was awarded for 40% of the equipment’s cost and the cash was received on 1 July 2015. Conditions relating to maintaining employment are attached to the grant and if they are not satisfied, then the grant becomes repayable, or partly repayable.

Dodowa Ltd expected to meet these conditions when the grant was applied for. However, due to worsening economic conditions, redundancies for some staff on 31 December 2016 resulted in a repayment of 10% of the original grant becoming due. The repayment was made on 1 February 2017. Dodowa Ltd accounted for the grant as a reduction in the carrying amount of the asset.

Required:
Explain, with suitable calculations, the financial reporting treatment of the above in the financial statements of Dodowa Ltd for the year ended 31 December 2016 in accordance with IAS 20: Accounting for Government Grants and Disclosure of Government Assistance.

Answer

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Tags: Asset Valuation, Depreciation, Government Grants, Grant Repayment
Level: Level 3

Topic: IAS 20 and IAS 40)
Series: NOV 2017

AT – NOV 2021 – L3 – Q1a – Business income – Corporate income tax | International taxation

Compute tax payable for a Free Zone Enterprise based on income from local and export sales and determine the treatment of certain adjustments.

Question

Orga Ltd has the following information relating to its operation as a Free Zone Enterprise for the 2020 year of assessment with a basis period from January to December each year:

Description	Amount (GH¢)
Revenue	35,000,000
Cost	(21,000,000)
Profit	14,000,000

Additional information:

Depreciation of GH¢200,000 has been added to the cost above.
Revenue: Local sales GH¢25,000,000; Exports GH¢10,000,000.
The Managing Director was provided with a mini bar and a swimming pool as part of his employment package costing GH¢1,200,000 in his private residence. The employer added only GH¢200,000 as part of the employment income for tax purposes. The total cost has been adjusted to the cost above.
The dividend received from the United States of America net of taxes of 10% was GH¢22,500. This income has not yet been recorded, although it has been credited in the bank statement.
The excess proceeds from the sale of a depreciable asset over the written down value amount to GH¢300,000. This has not yet been recorded in the company’s accounts.

Required:
i) Compute the tax payable. (6 marks)
ii) Explain the tax treatment of the cost of the swimming pool and mini bar. (2 marks)

Answer

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Tags: Depreciation, Dividend income, Excess Proceeds, Export Sales, Free Zone Enterprise, Local sales, Tax computation, Tax Treatment
Level: Level 3

Topic: Business income - Corporate income tax, International taxation
Series: NOV 2021

AT – Dec 2023 – L3 – Q4 – Business income – Corporate income tax

Computing the maximum capital allowances and chargeable income for STE Ltd for the year ended 31 December 2021.

Question

STE Ltd was incorporated in 2020 and commenced business operations on 1 January 2021, specializing in manufacturing and distributing solar panels and related products. The company secured a two-year loan of GH¢750,000 with an interest rate of 15% per annum from a local financial institution. The loan was applied as follows:

Loan Application	Amount (GH¢)
Showroom construction at Tema	100,000
Procurement of plant and machinery	250,000
Procurement of raw materials	300,000
Procurement of commercial vehicles	70,000
Amount applied towards 2021 consultancy fees	30,000
Total	750,000

The company’s fixed asset register as at 31 December 2021 is as follows:

Fixed Assets	Cost (GH¢)	Depreciation (GH¢)	Net Book Value (GH¢)
Head office building	150,000	3,750	146,250
Factory building	120,000	6,000	114,000
Furniture and fittings	65,000	6,500	58,500
Office computers	80,000	16,000	64,000
Total	415,000	32,250	382,750

STE’s statement of comprehensive income for the year ended 31 December 2021 is as follows:

Additional information:

Staff welfare includes a penalty for late PAYE payment (GH¢5,000), staff end-of-year party (GH¢7,350), and initial payroll software license (GH¢14,000).
Advertising and marketing includes GH¢3,800 spent on entertaining the Marketing Director’s family and friends.
Utility costs include GH¢13,640 for installing solar panels at the Tema showroom.
Interest consists of GH¢15,000 for a loan establishment fee, GH¢56,250 for 2020 interest, and GH¢112,500 for 2021 interest.
Research and development contributions were made to the Energy Commission of Ghana for solar-powered cookers and heaters research.
The operating licence was paid to the Tema Metropolitan Assembly for the factory’s initial license.

Required:
a) Calculate the maximum capital allowances claimable by STE Ltd for the year ended 31 December 2021.
b) Calculate the chargeable income and tax payable by STE Ltd for the year ended 31 December 2021.

Answer

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Tags: Business income, Capital allowances, Corporate Income Tax, Depreciation
Level: Level 3

Topic: Business income - Corporate income tax
Series: DEC 2023

AAA – May 2019 – L3 – Q1b – The audit approach, Audit evidence, Reporting

Evaluate the treatment of a property classified as held for sale, considering depreciation and subsequent remedial work.

Question

Abuakwa acquired a property in April 2018 at a cost of GH¢2.64 million. The property was not in a good state of repair, but Abuakwa needed an office space for critical administration functions in a central location and moved some staff in immediately. In January 2019, more suitable accommodation became available for the staff who were quickly relocated. A decision was taken to sell the property. Hence, it was decided not to provide any depreciation on the property in respect of the year under review.

However, significant remedial work was needed before the sale could be completed. This was commenced in early February 2019. The cost of this work is being expensed as ‘Repairs and Maintenance’ as incurred.

The property has a reserve price of at least GH¢4.2 million at a public auction scheduled for 30 June 2019. The property is classified as ‘Held for Sale’ at the year-end under IFRS 5: Non-current Assets held for Sale and Discontinued Operations at a value of GH¢4.2 million, and a gain of GH¢1.56 million has been recognised in the draft Consolidated Statement of Profit or Loss and Other Comprehensive Income.

(8 marks)

Answer

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Tags: Depreciation, Held for Sale, IFRS 5, Repairs and Maintenance
Level: Level 3

Topic: Audit evidence, Reporting, The audit approach
Series: MAY 2019

FA – Mar 2024 – L1 – Q4 – Non-current assets and depreciation | Preparation of financial statements of a sole trader

Prepare the Statement of Profit or Loss and Statement of Financial Position for Kontiba Enterprise, including necessary adjustments.

Question

Kontiba Enterprise

Statement of Profit or Loss for the year ended 30 September 2023

The following information is also available:
1) Only 10 months’ salaries are shown in the Trial Balance. An equal amount is paid for
salaries for each month of the year.
2) As at 30 September 2023, GH¢2,560 had been prepaid for insurance, whilst GH¢328 was
owing for general expenses.
3) GH¢3,680 had been charged to general expenses for the owner’s private holiday.
4) As at 30 September 2023, inventory was valued at GH¢18,000.
5) A customer, owing GH¢4,032 has been declared bankrupt. This amount is to be written
off in full.
6) An allowance for receivables is to be maintained at 3% of the receivables balance.
7) As at 30 September 2023, the business’s land was valued at GH¢80,000. Land is not
depreciated.
8) Depreciation is to be provided as follows:
Buildings: 4% per annum using the straight line method.
Equipment: 25% per annum using the straight line method.
Page 7 of 20

Motor vehicles: 40% per annum using the reducing balance method.
9) There were no additions or disposals of non-current assets during the financial year.

Required:
i) Prepare the statement of profit or loss for the year ended 30 September 2023. (10 marks)
ii) Prepare the statement of financial position as at 30 September 2023. (10 marks)

Answer

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Tags: Adjustments, Balance Sheet, Depreciation, Financial Position, Income Statement, Net Profit
Level: Level 1

Topic: Non-current assets and depreciation, Preparation of financial statements of a sole trader
Series: MAR 2024

FA – Mar 2024 – L1 – Q1b – Non-current assets and depreciation

Prepare journal entries for the depreciation, revaluation, and disposal of non-current assets.

Question

The draft statement of financial position of Tinkong Ltd as at December 31, 2023, depicts the following:

Description	GH¢
Plant and Machinery – Cost	4,954,824
Less: Accumulated Depreciation	1,917,016
Net Book Value	3,037,808

On reviewing the accounts of the business, its auditor found that the records have been correctly recorded except for the following events:

On January 17, 2023, a contract was signed for the purchase of a machine for GH¢450,000 which is to be delivered on July 17, 2024. The company made an advance payment of GH¢180,000 on signing of the contract and the balance was to be paid on delivery of the machine. The advance payment was debited to the plant and machinery account.
The cost of a new plant amounting to GH¢1,080,000 was acquired on January 21, 2023, and debited to the plant and machinery account. However, the cost of installation amounting to GH¢120,000 was debited to the repairs account.

Depreciation is charged on a reducing balance method at 10% per annum. Depreciation on new assets commences in the month in which the asset is acquired.

Required:

Prepare the following accounts indicating the closing balances as at December 31, 2023: i) Plant and Machinery
ii) Accumulated Depreciation – Plant and Machinery

Answer

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Tags: Accumulated Depreciation, Depreciation, Disposal of assets, Non-current Assets, Revaluation
Level: Level 1

Topic: Non-current assets and depreciation
Series: MAR 2024

FA – Nov 2023 – L1 – Q1b – Non-current assets and depreciation

Prepare the non-current assets and accumulated depreciation accounts for Pramso Ltd, including depreciation, revaluation, and disposal adjustments.

Question

The following details were taken from the records of Pramso Ltd for the year ended 31 December 2022:

i) Tangible non-current assets (at cost) as at 1 January 2022 were:

Description	Amount (GHȼ)
Land and buildings (Land GHȼ400,000)	700,000
Motor vehicles	450,000
Machinery	310,000

ii) Accumulated depreciation as at 1 January 2022:

Description	Amount (GHȼ)
Land and buildings	85,000
Motor vehicles	210,000
Machinery	80,000

Pramso Ltd depreciates non-current assets as follows:

Buildings – 4% per annum on cost.
Motor Vehicles – 20% per annum using reducing balance method.
Machinery – 15% per annum on cost. Depreciation is charged for each month of ownership for all the assets.

iii) On 1 July 2022, land was revalued by an expert to GHȼ520,000.

iv) A Motor Vehicle purchased on 1 January 2020 for GHȼ22,000 was sold for GHȼ6,000 on 1 April 2022.

v) Machinery purchased on 1 July 2020 for GHȼ70,000 was sold on 1 January 2022 for GHȼ24,000.

vi) During the year the following assets were bought:

Machinery GHȼ24,000 on 1 July 2022.
Motor vehicles GHȼ40,000 on 1 October 2022.

Required:

Prepare the Non-Current Assets account and Accumulated Depreciation account showing the depreciation charge for the year. (10 marks)

Answer

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Tags: Accumulated Depreciation, Depreciation, Disposal of assets, Non-current Assets, Revaluation
Level: Level 1

Topic: Non-current assets and depreciation
Series: NOV 2023

FA – July 2023 – L1 – Q4 – Preparation of limited liability company financial statements

Prepare the statement of profit or loss and statement of financial position for a limited liability company using the provided trial balance and adjustments.

Question

The following trial balance relates to Pakro Ltd at 31 July 2022:

The following matters remain to be adjusted for in preparing the financial statements for the year ended 31 July 2022:

The cost of inventory of GHȼ 38,400 for the year ended 31 July 2022 was based on an inventory count on 4 August 2022. Between 31 July 2022 and 4 August 2022, the following transactions took place:

Item	GHȼ
Purchases of goods	8,000
Sales of goods (profit margin 20% on sales)	12,000
Goods returned by Pakro Ltd to a supplier	800

Trade receivables totaling GHȼ24,000 are to be written off and allowance for receivables is to be adjusted to GHȼ8,000. The irrecoverable debt expense is to be included in administrative expenses.
Pakro Ltd receives rent for subletting part of its building. The rent, which is receivable quarterly in advance, was received as follows:

Date of receipt	Period covered	GHȼ
1 July 2021	3 months to 30 September 2021	7,200
1 October 2021	3 months to 31 December 2021	7,200
30 December 2021	3 months to 31 March 2022	9,000
4 April 2022	3 months to 30 June 2022	9,000
1 July 2022	3 months to 30 September 2022	9,000

The loan of GHȼ60,000 was taken out on 1 January 2022 with annual interest of 12%. The interest is payable in equal instalments on the first day of April, July, October, and January in arrears. The loan is repayable in full during the financial year ended 31 July 2026.
Depreciation is to be provided for as follows:
- Buildings 2.5% per year on cost
- Plant and equipment 25% per year on cost
- 70% of the depreciation is to be charged in cost of sales, and 15% each in distribution costs and administrative expenses.
Current year income tax charged was GHȼ18,105.

Required:

a) Prepare the Statement of Profit and Loss for the year ended 31 July 2022. (10 marks)
b) Prepare the Statement of Financial Position as at 31 July 2022. (10 marks)

Answer

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Tags: Depreciation, Financial Statements, Income Statement, Inventory Adjustment, Loan Interest, Rent Income, Statement of Financial Position, Trial Balance
Level: Level 1

Topic: Preparation of limited liability company financial statements
Series: JULY 2023

FA – Aug 2022 – L1 – Q2 – Non-current assets and depreciation | Preparation of Partnership accounts

Preparation of ledger accounts for office equipment and disposal, calculation of profit due to a partner, and preparation of an appropriation account and current accounts for partners.

Question

a) The following Statement of Financial Position extract has been taken from the accounts of Yamfo Ltd as at 31 December 2020:

Non-current Assets	Cost (GHȼ)	Accumulated Depreciation (GHȼ)	Net Book Value (GHȼ)
Office Equipment	172,800	92,100	80,700

During the year ended 31 December 2021, the following transactions took place in relation to Office Equipment.

Disposals:

Equipment	Disposal Date	Purchase Date	Original Cost (GHȼ)	Disposal Proceeds (GHȼ)
Equipment 1	31 March 2021	1 January 2018	22,000	4,000
Equipment 2	30 June 2021	1 January 2017	30,000	5,100

Additions:

Equipment	Date of Addition	Cost (GHȼ)
Equipment 3	1 October 2021	35,000

Depreciation for Office Equipment is charged using the straight-line method based on a five-year life and an estimated residual value of 10% of the original cost. Depreciation is applied from the date the Office Equipment was bought until it was sold. All transactions were by cheque.

Required:
i) Prepare the Office Equipment ledger account for the year ended 31 December 2021.
(2 marks)

ii) Prepare the Disposal of Office Equipment ledger account for the year ended 31 December 2021.
(4 marks)

b) The following balances are in the books of a partnership as at 31 December 2021:

Account	Amount (GHȼ)
Capital accounts Badu, as at 1 January 2021	500,000
Tawiah, introduced 1 July 2021	300,000

Drawings	Amount (GHȼ)
Badu	220,000
Tawiah	100,000

Additional information:

Until 30 June 2021, Badu had run the business as a sole trader. Tawiah joined him on 1 July 2021, introducing capital of GHȼ300,000.
Under the partnership agreement, the balance of profit is to be shared between Badu and Tawiah in the ratio 3:2. No interest is to be charged on drawings. Both partners are to receive interest on their capital account balances at 5% per annum. Tawiah is to receive a salary of GHȼ40,000 per annum, but no salary is to be paid to Badu.
The profit for the year ended 31 December 2021 was GHȼ330,000. It was agreed that this profit had accrued one-third in the six months ended 30 June 2021 and two-thirds in the six months ended 31 December 2021, except for an irrecoverable debt of GHȼ30,000 charged in arriving at the profit, which was to be regarded as occurring in the six months ended 30 June 2021.

Required:
i) Calculate the amount of profit due to Badu for the six months to 30 June 2021.
(2 marks)

ii) Prepare the Appropriation Account for Badu and Tawiah for the six months ended 31 December 2021.
(6 marks)

iii) Prepare the Current Accounts for Badu and Tawiah for the year ended 31 December 2021.
(6 marks)

Answer

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Tags: Depreciation, Disposal of assets, Partnership Capital Accounts, Profit Sharing
Level: Level 1

Topic: Non-current assets and depreciation, Preparation of Partnership accounts
Series: AUG 2022

FA – April 2022 – L1 – Q4 – Accruals and prepayments | Bad and doubtful debt | Non-current assets and depreciation | Preparation of financial statements of a sole trader

Preparation of the Statement of Profit or Loss and Statement of Financial Position for a sole trader, including adjustments for depreciation, doubtful debts, and prepayments.

Question

The following trial balance was extracted from the books of Nsaa Zolko, a sole trader, on 31 December 2020:

Account	Debit (GHȼ)	Credit (GHȼ)
Land	251,200
Equipment	202,220
Accumulated depreciation on equipment		62,830
Inventory	49,620
Receivable and Payable	124,200	104,350
Value Added Tax (refund due)	10,320
Deposit on rented premises (security deposit)	17,900
Bank and Cash balances	15,640
Allowance for doubtful debt		11,250
Tax Liability		7,420
Business Rent	30,000
Sales		804,500
Purchases	390,200
Returns	8,300	7,500
Discount	4,300	6,240
Distribution and Advertising	8,900
Power	4,200
Communication	1,540
Insurance	22,500
Wages and Salaries	164,380
Employers Social Security contribution	16,560
4% Long term loan		182,500
Long term loan interest	3,520
Bad debt	2,240
Drawings	10,580
Retained Earnings		44,820
Capital		103,710
Suspense		3,200
Total	1,338,320	1,338,320

Additional Information: i) The inventory count as at 31 December 2020 showed closing inventory value at GHȼ42,390. ii) Nsaa Zolko has agreed an annual rent of GHȼ40,000 with his landlord. iii) Included in insurance above is an amount of GHȼ18,000 paid to insure the equipment. The policy year ends 28 February 2021. iv) Nsaa Zolko has specific concerns over GHȼ5,120 of receivables balance and wishes to set up a specific provision with respect to these balances. The general provision on the remaining receivable balance should be at 5%. v) Depreciation is to be charged as follows:

Land: No Provision
Equipment: 15% reducing balance method (Depreciation should be calculated to the nearest whole number). vi) The suspense account balance above relates to sales of GHȼ1,600 which was recorded as purchases in error. The receivables and payables balances are correct.

Required:
a) Prepare a Statement of Profit or Loss for the year ended 31 December 2020.
(10 marks)

b) Prepare a Statement of Financial Position as at 31 December 2020.
(10 marks)

Answer

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Tags: Accruals, Depreciation, Doubtful Debts, Prepayments, Statement of Financial Position, Statement of Profit or Loss
Level: Level 1

Question Tag: Depreciation

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Prepare the non-current assets and accumulated depreciation accounts for Pramso Ltd, including depreciation, revaluation, and disposal adjustments.

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